Sustainable Finance and the Rise of Investment Conscience

At SIFMA’s 2016 Annual Meeting, The Capital Markets Conference, sustainable finance was high on the agenda. SIFMA brought together representatives from across the spectrum of sustainable finance, including government, large capital market firms, not-for-profits and investors. Congressmen John Delaney (D-MD) and Tom MacArthur (R-NJ) participated in the panel in their capacity as co-chairs of the Congressional Social Investment Task Force.

Panelists touched on the ability of sustainable finance to catalyze the reimagining of philanthropy, government services, and public-private partnerships.

“Sustainable investments need to be thought of at the macro level,” said Congressman Delaney. “To solve social problems, you need to invest money. It’s hard to make transformative change in the world unless someone makes an investment.”

He noted that individual investors are cautious right now because of global conditions. Nevertheless, “if you look at the balance sheets of non-governmental entities, there has never been more liquidity, there have never been more assets to invest.” Creating pathways for some of that capital “is good macro policy and we should be encouraging it,” he said.

Panelists highlighted how sustainable finance has successfully achieved bipartisan support. “People are crying for solutions,” said Congressman MacArthur. “We put things in boxes. This belongs to the private sector, this belongs to the public, this belongs to not-for-profits. Says who? Every sector is about solving problems and every sector comes at it from a different perspective.”

Congressman MacArthur further underscored the need for government to remove barriers and create incentives for risk-takers and innovators in the private sector. “I think there is enormous potential in that general direction if we bring the regulatory burdens down, ” he said.

Other panelists agreed that ESG (environmental, social, and governance) strategies have shown a sustained, superior performance when compared to traditional investing strategies. “This field is rich,” said Tracy Palandjian, founder of the company Social Finance. “We are seeing more and more creative, innovative products - in affordable housing, in education, in many areas.”

Earlier in the day, former Secretary of the Treasury Henry M. Paulson, Jr. noted the importance of green finance in solving environmental challenges. “It’s going to take a huge amount of money to really fund the investments in renewable energy,” Paulson noted. “This is where green finance is so important.”

Panelists noted a sea change in client demand, saying that many of today’s clients look beyond merely the return on their investment: “All of us need to play a role in providing that packaged solution that our clients are looking for,” said Fredrik Axsater, managing director at State Street Global Advisors. “They want their investment policy to be consistent with the goals and values of their employees. Sustainable finance needs to be part of an overall portfolio, not just a priority on the side.”

Congressman Delaney noted, “Companies are focused on values because their stakeholders have values.” In a world with so much transparency and information, companies will hear about it if they act against stakeholder values. “There’s this great positive feedback loop that has allowed people to think about asset allocation. It’s not philanthropy; it’s smart investment, because they see where the world is going and that employees and customers care about values.” He believes that funds that focus on value-driven strategies have done well.

When executed correctly, panelists noted that the private sector and public sector working together can achieve lofty aims. “The benefit of bringing the private sector into what a traditionally taxpayer-funded social initiative is that you bring the discipline of the private sector. You bring the need to see positive performance and returns,” said Kyung-Ah Park, head of environmental markets at Goldman Sachs.

The discussion further underscored how sustainable finance is much broader than just public-private partnerships. “It’s the whole range of investments that have a social end-game to them and that are trying to solve problems that matter to them,” said Congressman MacArthur.

In general, markets have seen a shift toward value-driven investment strategies. “As a whole, millennials want meaning in their life,” said Congressman MacArthur. “They want investments to meet their ideals andmake money.” With sustainable investing, we have “the potential to meet the needs of the generation that is about to take over the world.”

Chris Killian is Managing Director for SIFMA

David Strongin is Executive Director for GFMA